CARES Act: Individual Tax Provisions
briefing by David Kaplan, CPA; Ron Kuyath, CPA; and Jill Clark, CPA
Coronavirus Aid, Relief, and Economic Security Act
On Friday, March 27, 2020, President Trump signed the “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) into law. This law marks the single largest economic stimulus package in history and is intended to provide relief to the many businesses and individuals impacted by COVID-19.
There are a number of different components of the law, including several significant changes to the tax law. Below is a summary of the tax law provisions that impact individual taxpayers.
We will be continually monitoring additional guidance as it is released and will provide updated information on this page as it becomes available, so please check back often. In addition, please feel to reach out to your BRC tax advisor with any questions you may have.
Recovery Rebates and Other Individual Provisions
2020 Recovery Rebates for Individuals
On March 30, 2020, the IRS released additional guidance related to the recovery rebate payments. The following are the key points from their news release:
- They have stated that the distribution of payments will begin in the next three weeks and, for most people, no additional action is required.
- It was initially announced that those that do not typically file a tax return because they are under the filing thresholds would have to file a “simple tax return” in order to receive the recovery rebate payment. On April 1, 2020, the IRS revised this information stating that social security recipients who are not typically required to file a tax return, do not need to file anything further. These individuals will automatically receive their payment in the same manner they normally receive their benefits payments, through direct deposit or via a paper check. It is unclear whether other non-filers, who are otherwise eligible for the payments, will need to file a “simple tax return” in order to provide the IRS with the information necessary to determine their payment.
- For those that have not already provided their bank account information with their tax returns, a web-based portal is being developed for individuals to be able to provide this information to the IRS. This will allow for individuals to receive their payments more quickly than they might otherwise receive a paper check.
The following is a link to the IRS webpage where you can check for the latest guidance on this topic and/or other topics surrounding ‘Coronavirus Tax Relief’: https://www.irs.gov/coronavirus
The following is the original summary of the CARES Act provisions:
- Individuals, meeting certain income thresholds, will receive checks (or direct deposits) in the amount of $1,200 ($2,400 for those married filing jointly) plus $500 for each qualifying child (not attained the age of 17).
- The applicable rebate amount will be reduced if a taxpayer’s adjusted gross income (AGI) exceeds certain thresholds: $150,000 (married filing jointly); $112,500 (head of household); $75,000 (all other taxpayers). The amount a taxpayer will receive will be reduced by 5% of the excess of their AGI over their applicable threshold amount. The following are a couple of examples to show how this works:
- Example #1: Single taxpayer, no kids, AGI of $100,000; $1,200 potential rebate
- Determine excess of AGI over applicable threshold: $25,000 ($100,000 AGI minus the $75,000 threshold for single taxpayer)
- Calculate 5% of excess amount: $1,250 ($25,000 excess amount x 5%)
- Determine eligible rebate amount: $0 ($1,200 potential rebate amount – $1,250 reduction amount)
- Example #2: Married couple, two kids, AGI of $200,000, $3,400 potential rebate
- Determine excess of AGI over applicable threshold: $50,000 ($200,000 AGI minus the $150,000 threshold for married filing joint taxpayers)
- Calculate 5% of excess amount: $2,500 ($50,000 excess amount x 5%)
- Determine eligible rebate amount: $900 ($3,400 potential rebate amount – $2,500 reduction amount)
- Adjusted gross income determinations will be made based on the taxpayer’s 2019 tax return. For taxpayer’s who have not yet filed their 2019 return, the adjusted gross income determination will be made based on the 2018 filing. For taxpayer’s who have not filed a 2018 or 2019 income tax return, information will be pulled from 2019 Forms SSA-1099 (Social Security Benefits Statement) or Form RRB-1099 (Social Security Equivalent Benefit Statement).
- Taxpayers will be required to recalculate the credit on their 2020 return. If, based on their 2020 adjusted gross income, they are eligible to receive a credit amount in excess of the advanced rebate amount received, they will get that additional credit against 2020 income taxes. However, if a taxpayer receives more advanced credit than is calculated on their 2020 return, the taxpayer will not be required to repay any of the advanced amount.
- Taxpayers, and their spouse and dependents, must have provided valid identification numbers on their tax return to be eligible for the rebate amounts. There are certain exceptions for members of the Armed Forces.
- The following are not eligible to receive recovery rebate payments: (1) nonresident aliens; (2) estates and trusts; (3) individuals that are able to be claimed as a dependent on someone else’s tax return.
- Amounts received will be treated as a refund of taxes paid, therefore; will not be considered additional taxable income to the recipients.
- Example #1: Single taxpayer, no kids, AGI of $100,000; $1,200 potential rebate
Special Rules for Use of Retirement Funds
- The 10% early withdrawal penalty will not apply to “coronavirus-related distributions”.
- Distributions to which this provision applies cannot exceed $100,000 per individual.
- Amounts withdrawn may, at the election of the taxpayer, be reported as taxable income ratably over the 2020, 2021 and 2022 tax years.
- Individuals who take “coronavirus-related distributions” may repay up to the amount distributed to an eligible retirement plan any time during the 3-year period beginning on the day after the date the distribution was taken.
- “Coronavirus-related distributions” are distributions taken on or after January 1, 2020 and before December 31, 2020 to one of the following individuals:
- An individual who has been diagnosed with COVID-19 by a CDC approved test,
- An individual whose spouse or dependent has been diagnosed with COVID-19, or
- An individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, unable to work due to child care needs or closing or reduction in hours of a business operated by the individual.
- The law also provides for an increase in the amount an individual can borrow from a qualified employer plan from $50,000 to $100,000 and employees may borrow up to the present value of their entire nonforfeitable balance in the plan (versus the previous 50% limitation). This law is in effect for a 180-day period from the date the law is enacted. The law also states that any payments due between March 27, 2020 through December 31, 2020 are delayed for one year. This includes loans existing prior to the law being enacted.
Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts
- For those that have a required minimum distribution requirement for 2020, the law waives this requirement for 2020.
- This waiver also applies to participants who turned 70 ½ in 2019 and had not yet received their 2019 distribution before December 31, 2019 (those deferred until April 1, 2020).
Allowance of Partial Above the Line Deduction for Charitable Contributions
- For tax years beginning in 2020, taxpayers that take the standard deduction, are allowed a deduction from taxable income (in addition to the standard deduction) of up to $300 for qualifying charitable contributions made in cash.
Modification of Limitations on Charitable Contributions During 2020
- Taxpayers that make qualifying charitable contributions during 2020 will be allowed to deduct an amount up to their AGI less all other charitable contributions otherwise deductible for the year under the normal charitable contribution limits.
- To qualify the contributions must be cash contributions made during calendar year 2020 to an eligible public charity.
- Qualifying contributions are those that would normally have been subject to the 60% AGI limitation under existing law and excludes contributions made to donor advised funds and 509(a)(3) supporting organizations.
- The law also increases the income limits on contributions of wholesome food inventory made during 2020 from 15% to 25%.
- Contributions made in excess of the allowable amounts will be carried over to the taxpayer’s subsequent tax year and will be subject to the limitations in place under the existing laws.
Exclusion for Certain Employer Payments of Student Loans
- Existing law allows an employer to pay up to $5,250 per calendar year of “educational assistance” to an employee on a tax-free basis.
- The CARES Act has broadened the definition of “educational assistance” to include, for payments made between March 27, 2020 and December 31, 2020, amounts paid on behalf of employees to cover principal or interest on any qualified educational loan incurred by the employee for the education of the employee.
- These payments may be made to the employee or directly to the lender.
- Taxpayers whose employers make these payments on their behalf cannot then take a deduction on their individual tax return for the interest paid by their employer.
Modification of Limitation on Losses for Taxpayers Other Than Corporations
- The Tax Cuts and Jobs Act of 2017 created a limitation on an individual’s ability to deduct trade or business losses in excess of certain thresholds (known as the “excess business loss” limitation). This limitation applied to taxpayers starting with their 2018 tax years. The law has delayed the effective date that taxpayers are subject to this limitation until 2021 tax years. Therefore, taxpayers who were subject to this limitation on their 2018 or 2019 (if already filed) tax returns can amended these returns to claim a refund.
- The law also provided some clarification regarding amounts taken into account for determining the amount of a taxpayers “excess business loss”.
Modifications for Net Operating Losses
- For taxpayers that incur a net operating loss in taxable years beginning after December 31, 2017 and before January 1, 2021, they may carryback these losses to each of the 5 taxable years preceding the taxable year of the loss. Taxpayer’s that do not wish to carryback losses generated in 2018 and/or 2019 must make an election to forego the carryback periods by the due date (including extensions) of their return for the first taxable year ending after March 27, 2020.
- The law removes the 80% taxable income limitations and allows for taxpayers to fully offset their taxable income for tax years beginning before January 1, 2021.
Ron Kuyath Tax Partner, CPA
Ron is a tax partner with over 37 years of experience in public accounting. Ron has been serving clients in various industries, including affordable housing, commercial real estate, manufacturing and distribution (consumer products, industrial controls, plastic molding and extrusion, textiles). He has consulted on numerous merger and acquisition transactions, assisted with tax accounting method changes and represented clients […]